Work in progress is a category of inventory used by manufacturing companies to track products in production but not yet ready for sale. It appears as an asset on the balance sheet and includes raw materials, labor, and factory overheads. Proper management of work in progress allows a manufacturer to invest the right amount of financial resources in raw materials and determine inventory turnover ratios.
Work in progress, also known as work in progress, is a category of inventory that is commonly used by manufacturing companies. It allows a business to track products that are in a stage of production but not yet ready for sale. This category appears as an asset on the company’s balance sheet and includes a valuation of raw materials, labor and factory overheads that is tied to production at the time the company’s balance sheet is generated.
Inventory management is a critical part of business operations for manufacturing companies. Typically, a manufacturer has a significant portion of its financial resources tied to its inventory and manufacturing process. Often, the production process will cover financial reporting periods. To generate accurate financial reports that reflect the state of the company’s assets and liabilities, the company must have a way to identify and quantify assets that are not raw materials waiting to be used or finished products waiting to be sold.
A manufacturer uses three categories of inventory to track its assets for accounting purposes: raw materials, work in progress, and finished goods. The goods in progress category is a holding account that allows the company to assign a value to the resources tied up in the production phase. Without this account, a portion of the company’s assets would be invisible until the assets reach the finished product stage.
The account is listed in the assets section of the company’s balance sheet. Quantitatively, the category consists of the raw materials used in addition to the labor costs and overheads required to produce the goods in process. These components are valued at cost or realizable value, whichever is less. It is important not to value goods in progress at retail cost or cost of finished goods because that type of valuation is speculative and can inflate the company’s assets. Profits should not be included in the financial statements until the amounts are recognized or received.
Proper management of ongoing goods allows a manufacturer to invest the right amount of financial resources in raw materials and not overspend. Raw materials sitting in inventory, waiting to be processed, represent money that the company cannot use to pay other bills. The account can be used to determine inventory turnover ratios. This type of information is critical to enabling a business to keep up with customer orders without generating excess or shortage of inventory.
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